Self-Employed or Not? Employment Relationship or Self-Employment?
These are questions that are widely discussed not only in the Netherlands but also in the Caribbean Kingdom. The criteria are identical in both legal jurisdictions.
The distinction between being an employee or self-employed is crucial for the application of labor law, taxation, and social security legislation. Employees, for example, have job protection, and income tax and premiums must be deducted for them. Under certain circumstances, employees are entitled to benefits. None of these apply to the self-employed. They are only subject to income tax and, unlike employees, generally have access to some tax facilities.
For freelancers, especially those labeled as self-employed without personnel (ZZP'ers), it is often challenging to determine if the employment relationship they have with their client is indeed an employment contract. This is also relevant for the client because if it is deemed an employment relationship, the client must pay premiums and income tax. Moreover, an employee usually falls under a pension scheme for which premiums must be paid. If the client does not do these things, thinking they are dealing with a self-employed individual but it turns out to be incorrect, income tax and premiums can be retroactively imposed on them for several years, with interest and sometimes with penalties. Since this assessment usually cannot be recovered from the employee, it also leads to a grossing up: the uncollected tax and premiums themselves become income. In short, a costly affair. Vigilance is therefore essential.
For the government, the importance is also significant from a budgetary perspective. In the Netherlands, for example, there are over 1 million ZZP'ers. While the exact number is unknown, it is established that a substantial portion is falsely self employed, essentially being employees. Therefore, it is crucial for all parties to determine the nature of the employment relationship in specific cases. The challenge lies in the fact that the concept of a self-employed entrepreneur, and especially that of an employee, is not defined by a set of objective, unambiguous criteria. The key characteristic of an employment relationship is the authority relationship, which is often translated as the client being able to give instructions to the contractor. Determining whether this exists can be challenging. However, it is established that the Supreme Court generally interprets this concept fairly broadly.
This has recently been demonstrated again in the well-known Deliveroo ruling. Although it dealt with labor law, it undoubtedly has implications for tax and premium levies. In this ruling, the court determined that Deliveroo couriers are in an employment relationship with Deliveroo. Similar issues are currently at play with Uber taxi drivers, and there is also a pending legal procedure on that matter.
The government is keen on resolving this issue. The simplest route, in my opinion, is to align the tax and premium burden on ZZP'ers and their clients more closely with the burden on employees and employers. There is a significant difference in the Netherlands in what makes it attractive for both the client and the contractor to have a ZZP position. However, this route seems politically challenging. Therefore, there is a need to find an alternative, namely, to clearly define in the law when an employment relationship exists. A proposal has recently been made in this regard through an internet consultation. It has recently closed and received many responses. The core of the proposal is to add another criterion to the criteria for an employment relationship, specifically the authority relationship. In short, if the contractor's activities are embedded in the organizational activities of the client, it constitutes an employment relationship. If not – and there is no authority relationship – it should, in principle, be entrepreneurship. Additionally, it is intended to determine a minimum hourly fee. If the compensation is below this, it indicates an employment relationship. This latter criterion is a purely objective criterion and is therefore easily testable. However, it is likely not very distinctive because it is relatively low. The other criterion – whether the work is embedded in the client's organization – is somewhat disastrous. It is not easily testable because it depends heavily on the factual circumstances, which vary from case to case. Introducing such a criterion would only make the issue more significant rather than smaller. Therefore, caution is warranted for the Caribbean Kingdom: don't go down that path.
What alternative route is there then? As mentioned, a significant part of the falsely self-employed issue is likely to be resolved if the tax and premium burden for employees and self-employed individuals does not differ too much. Additionally, it is wise to assess not so much the concept of an employee but rather the concept of a self-employed individual. This assessment is more straightforward to carry out. Currently, something similar is being investigated under my guidance. Hopefully, it will work because it could be useful in the Caribbean Kingdom as well.
Peter Kavelaars is a professor of Tax Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.
